·Answer all questions. Please show your calculations clearly to receive partial credit. ·If you make any assumptions that violates the information already given, those assumptions will be considered...

·Answer all questions. Please show your calculations clearly to receive partial credit.

·If you make any assumptions that violates the information already given, those assumptions will be considered invalid and you will not receive credit for your answer.

·Clearly label your answers (question numbers and sub-parts).

·Answers can be handwritten or compiled using Microsoft Word. If you are using Word, you can insert Excel worksheets in the Word document for numerical analysis.

·It is acceptable to complete the test on Excel;however, youmust usetext boxes within Excel for the written portion of the answers.Text boxes should be properly formatted (all text should be visible when a worksheet is printed).If you are using an Excel file, please use a separate worksheet for each problem.

·Please note that I will not accept two separate answer files.

Question 1

The Nature’s Best Landscaping Company provides landscaping services to its clients. The company uses an activity-based costing system for internal costing purposes. The company has provided the following data related to annual overhead costs from itsactivity-based costingsystem.

Cost PoolTotal CostCost DriverTotal Activities

Landscaping$ 302,993Landscaping hours43,100 hours

Job support$79,100Number of jobs5,000 jobs

Client support$33,348Number of clients180 clients

Total$ 415,441

In addition, annual organization sustaining costs of the company were $43,520.

One particular client, the Bowman family, requested 36 jobs during the year that required a total of 104 hours of landscaping services during the year. Nature’s best planted some shrubs in the Bowman garden, and the cost of the trees were $750. Cost of fertilizer and other chemicals used in the yards cost $360. Nature’s Best billed Bowman $2,400 for the year.

a.Using the activity-based costing system, compute the profit margin for the Bowman family. Round off all calculations to the nearest whole cent.

10 points

b.Assume that the company decides to use a traditional costing system (instead of the ABC system), in which ALL indirect costs (including the organization sustaining costs) are allocated to customers on the basis of landscaping hours. Compute the margin for the Bowman family. Round off all calculations to the nearest whole cent.Please note that the traditional cost system is used here for an internal decision, so the company does not need to follow GAAP.

8 points

c.Briefly explain why there is a discrepancy between the total cost of servicing theBowman familycalculated under activity-based costing and that calculated under traditional costing.

5 points

d.Implementing an ABC system is complex and costly. Provide three situations, in which an ABC system will be beneficial to a company.

6 points

Total 29 points

Note: If you are using Excel for question 2, create a separate contribution format income statement for each part.

Question 2

Connelly Inc., a manufacturer of quality electric ice cream makers, has experienced a steady growth in sales over the past few years. Since her business has grown, Jan, the owner of the company believes she needs an aggressive advertising campaign next year to maintain growth.

The data for the current year are as follows:

Variable cost per ice cream maker

Direct labor$13.50

Direct material14.50

Variable overhead6.00

Total variable costs$34.00

Fixed costs

Manufacturing$82,500

Selling42,000

Administrative356,000

Total fixed costs$480,500

Selling price per unit$65.00

Required:

a)If the costs and sales price remain the same, what is the projected profit for the next year if the expected sales volume is 30,000 units?

4 points

b)If the costs and sales price remain the same, what is the breakeven point in units for the next year?

4 points

c)Next year, Jan wants to achieve a sales target of 35,000 units. She thinks she can achieve this through a $200,000 per year advertising budget. All other costs and the selling price are expected to remain the same. What will be the expected profit, if $200,000 were spent on advertising and the company achieves the 35,000 sales volume?

4 points

d)If you only consider the financial factors (bothrisk and return), should Jan's proposal be implemented? Briefly explain.

4 points

e)If she spends additional $200,000 on advertising, what is the sales revenue (in dollars) required to achieve the same profit as (a) above?

5 points

f)An engineer has proposed an alternative approach to achieve profit growth. If the company automate the production process the direct labor cost per machine will drop to $3.50 and the fixed manufacturing costs will increase by $200,000 per year. However, the ice cream maker the company makes will be of superior quality and the engineer predict the company will be able to sell 40,000 units at $70 each. What is the impact on profit (compared to the profit calculated in (a) above) if this proposal is implemented? All other costs will remain the same as the current year.

5 points

g)What other factors should they consider before making the final decision?

4 points

Total 30 points

Question 3

M Corporation, a small privately owned company, manufactures a particular spare part (part X) for lathe machines. The company has been very successful in the past, mainly due to the quality of its product.Spare part X is machine-made, and the quality of the product is largely dependent on the craftsmanship of the machinists. M Corporation was started and is majority owned by Mr. Goodman, who recently resigned from his position as the CEO. At the beginning of this year, Mr. Goodman was replaced by Mike Boss, a complete outsider. Mike has a degree in mechanical engineering and an MBA, and most of his prior experiences were in manufacturing. Mr. Goodman has an accounting/finance background, and as a result, during his tenure, he was in charge of those functions in addition to being the CEO. Mike has been handling the budgeting process of the company since he joined. He prepares all subcomponents of the master budget, except for the sales budget. He does this with little or no input from the relevant departmental managers.Human resources and payroll functions of the company have been outsourced.

The key employees of M Corporation and selected information pertaining to each is as follows:

·Tom Selling is the sales manager. He is responsible for setting the selling price and preparing the sales budget. His performance bonus is tied to meeting the annual sales budget targets.

·Bob Maker is the production manager. He is responsible for production operations and costs. Bob’s performance bonus is tied to meeting the budgeted production cost.

·Jim Buyer is the purchasing manager and is responsible for all purchasing-related activities. Jim’s performance-based bonus is tied to the direct materials purchases budget.

·Matt Shipping is in charge of the outbound logistics and customer service. His performance bonus is also based on his annual performance review conducted by Mike.

As the owner, Mr. Goodman is concerned about the direction the company is heading, and he hired you as an out-side consultant to review the company’s overall operations and make recommendations.

Yesterday (assume it was Wednesday, March 21, 2018), you attended the monthly performance review meeting, which was conducted to review February operations. Mike Boss, whose primary goal is cost reduction, started conducting monthly performance review meetings as soon as he joined the company. These meetings are held on the third Wednesday of each month, (to review the performance of the previous month). The primary purpose of these meetings is to compare the actual costs with the budgeted costs for every department. Whenever a department attained its budget in a given month, Mike Boss “tightened” the monthly budget numbers for the future months.

Yesterday’s performance meeting was chaotic. Bob Maker was under fire for not being able to meet the budgeted production cost (See below for the performance report that Mike Boss used to evaluate the production department).

Production Department

February Performance Report

¹Labor cost (both budgeted and actual) include a fixed salary of $2,050. All other labor costs are variable.

²Other supplies cost varies with the number of units produced

³The budgeted overhead cost includes $20,000 fixed cost related to rent, depreciation, and machine leasing costs. The remainder of the overhead cost is variable.

Maker was also under fire for not being able to produce sufficient Part X to meet the actual demand. Defending the production department, Maker accused Selling of not providing him with a realistic sales budget to plan production activity. According to Maker, the actual demand for the product was much higher than the budgeted sales volume in the sales budget, and Selling had enough information to predict the demand. In order to accommodate the unplanned demand, Buyer had to rush-order some materials and expedite delivery.Maker also had to pay overtime for his hourly employees in order to meet the excess production needs. In addition, Maker and Selling ignored company’s ending inventory policy and sold every unit they had in February. Mike Boss approved all decisions related to meeting the unplanned demand. Company’s inventory policy (for both materials and finished goods) is to maintain inventories equal to 30% of its budgeted sales volume for the following month.

Adding to Maker’s frustration, during the meeting, Mike also announced the termination of Peter Skill, an experienced machinist. The reason was that “Skill’s productivity is below expectation”. Peter Skill had been with the company for a long time and has won many internal awards for the quality of his craftsmanship.

After yesterday’s meeting. Mr. Goodman himself prepared the following revised sales budget for the next three months.

Then he contacted you, a management consultant. As the consultant, you have been asked to provide answers to the following questions:

1. Was it reasonable for the production manager (Bob Maker) to receive all the blame fornot meeting the targets for the monthly production cost?Listtwo (2)reasons to justify your answer. Your reasons should be exclusively based on the information provided above.

6 points

2. Prepare a revised performance reportthat is suitable for performance measurementof the production department for February.

10 points

3. Using the revised performance report you prepared, briefly comment on the performance of the production department in February.

2 points

4. Listthree (3)budget andperformance measurement related problemsthat you can identify in this company (strictly based on the information provided).For each problem you identified, provide one solution to overcome the problem. (solution should match the problem)

9 points

e.Based on the revised sales budget and the other information available, calculate the number of units that the company should produce in March and April. (Assume that the company will adhere to the ending inventory policy in March and April)

5 points

Total 32 points

Question 4

a.Performance evaluation is an important part of an organization. In order to provide a comprehensive performance evaluation system, more and more companies are supplementing financial performance measures with non-financial measures. However, employees may find dysfunctional ways to improve performance if they narrowly focus on the item being measured. In other words, some actions that employees take to improve performance on a certain measure can have a negative impact on the overall organization or on other areas of the organization.

Nano Products is a company in the consumer electronics industry; specifically the “electronic gadgets” market. It is concerned that it is losing the competitive edge due to its slowness in introducing new electronic gadgets to the market. Research and development (R&D) division is responsible for new product development and enhancement of existing products. New product development entails creating novel product ideas and designing viable products.In order to increase the number of new products introduced to the markets, the company introduced a new performance measure for the R&D division,speed-to-market. Speed-to-market measures the time a product is in development (time from the inception of a product idea to when the product is ready for full-scale, market-ready production).

I.Identify two actions that employees/managers in the R&D division may take to improve the speed-to-market, but detrimental to the overall organization.Briefly explain(using 1-3 sentences) how each action you identified can be detrimental to the organization.

4 points

II.For each detrimental action you suggested, identify oneperformance measure or a change in operations/policiesthat will overcome the problem you identified. If your suggestion can lead to other dysfunctional behaviors, suggest a complimentary performance measure to overcome the dysfunctional behavior.

4 points

b.MSJ Programs Inc. produces software for individual users and small businesses. May Morgan manages the customer hot line department for the firm and is responsible for answering customer questions related to software products produced by all divisions of the firm. Which one of the following would be theleastappropriate measure of her performance? Briefly explain why it is the least appropriate measure.

I.Average time to provide an answer or solution to a customer.

II.Number of calls to the hot line, related to each new release of software.

III.Average time a customer is on hold.

IV.Number of customer complaints due to incorrect responses given to customers

4 points

c.David Burke is manager of claims processing for Continental Health Care System. His performance is evaluated using various measures agreed upon in advance with the general manager of the Health Care System. Which one of the following performance measures would likely have the least positive effect on Burke’s motivation and performance as well as on the efficiency and effectiveness of the claims processing function? Briefly explain your reason.

I.Processing cost per claim.

II.Average processing time per claim.

III.Percentage of claims processed accurately the first time.

IV.Total dollar amount of claims processed per month.

4 points

Total 16 points

Question 5

Joint Corporation manufactures special lawn mowers. Last week Joint Corp received a special-order inquiry from YoYo, Inc., a home improvement and garden retailer.YoYo plans to market a lawn mower similar to Joint’s model no. 5X5 and has offered to purchase 3,000 units of modified model no. 5X5 lawn mowers.The following data are available:

·Cost data for Joint’s model no. 5X5 lawn mower are as follows:

Direct materials$45

Direct labor$30 (2 hours at $15 per hour)

Manufacturing overhead,$70 (2 hours at $35 per hour)

·The normal selling price of model no. 5X5 is $180; however, YoYo has offered Joint only $115 because of the large quantity it is willing to purchase.

·YoYo requires a design modification that will allow a $4 reduction in direct-material cost.

·Joint’s production supervisor notes that the company will incur $8,700 in additional set-up costs and will have to purchase a $3,300 special device to manufacture the modified lawn mowers.The device will be discarded once the special order is completed.

·Total manufacturing overhead costs are applied to production at the rate of $35 per labor hour.Of this, $ 26 per hour is fixed manufacturing overhead.

·One of Joint’s staff accountants wants to reject the special order because “financially, it’s a loser.”He argues that he needs to allocate $5,000 of existing fixed administrative costs to the order “….aspart of the cost of doing business.”

a.Do you agree with this conclusion (to reject the special order) if Joint Corp currently has excess capacity?Show calculations to support your answer.

6 points

b.Do you agree with the staff accountants argument related to allocating the existing fixed administrative costs to the special order?Briefly explainwhy you agree/disagree (explain conceptually; no calculation is needed).

5 Points

c.Assume that Joint currently has no excess capacity.Would outsourcing the production of model 5X5 be an option that Joint could consider if management truly wants to do business with YoYo?(No calculation is necessary). List three qualitative factors that Joint Corporation should consider before making the outsourcing decision.

6 Points

d.List three qualitative factors that Joint Corporation should consider before it makes the decision to accept/reject the special order.

6 points

Total 23 points